"The American securities markets became, in effect, a domestic securities market with its huge resources frozen inside its borders…America, instead of exporting capital, now became for the most part an importer."
- May 3, 1974 "Euro-Capital Markets after the Removal of American Restrictions" – Address by SEC Commissioner A.A. Sommer, Jr. to the 1974 Annual General Meeting of The Association of International Bond Dealers
In the post-World War II period, the United States had been effective in helping to rebuild the economies of European countries. Such rebuilding was important as part of the Cold War and also benefited the U.S. economy. U.S. dollars flowed into Europe in the form of foreign aid, military assistance, and tourism; in turn, European countries gained the capacity to purchase U.S. goods which fueled the U.S. economy. As U.S. economic foreign policy intended, foreign issuers were tapping the U.S. capital markets, in part reducing the need for U.S. government aid, and experts predicted that foreign capital needs would continue to increase.
By the end of the 1950s and continuing into the 1960s, the U.S. began running a major balance of payment deficit. A balance of payment deficit is the difference between what a country spends abroad versus what it receives from abroad. At the same time, most of the developed world, including the United States, was on the gold standard. Because of the deficit, European countries, flush with dollars, were converting such dollars into gold which drained U.S. gold reserves.
In 1963, the balance of payment deficit dominated U.S. economic policy and the United States enacted controls to stem the outflow of dollars. One of these controls was the Income Equalization Tax which was intended to discourage U.S. investors from purchasing foreign securities. The IET imposed a steep tax on U.S. persons who acquired foreign securities. Additional capital controls were put into place in 1968. The IET and other controls essentially halted the internationalization of the U.S. securities markets. What was incorrectly assumed was that other markets could not fulfill the international demand for capital.
Simultaneously, the White House emphasized the need to increase foreign investment in U.S. securities. A White House task force made multiple recommendations, including having U.S. investment banks intensify efforts to reach foreign investors. The task force also found that investment banks should seek to modify "foreign regulations and practices which unduly restrict the ability of U.S. firms to promote the sale of U.S. securities or to deal directly with potential foreign customers."(67) The irony of this was that foreign issuers believed that the U.S securities laws unduly restricted their own efforts to raise capital in the United States.
The task force trumpeted the idea that U.S. issuers offering securities abroad might be able to "avoid the inconvenience and cost" of complying with registration requirements under the 1933 Act.(68) It also called upon the SEC to clarify when registration would not be required for U.S. issuers engaged in foreign offerings. It furthermore urged the SEC to eliminate the requirement that foreign brokers who participated in U.S. underwritings abroad be required to register as brokers with the SEC. In response, the SEC began to study whether the securities laws of other countries could be harmonized with U.S. securities laws. It also reassured issuers that, to the extent an offering of securities occurred entirely abroad, such offering would not have to be registered under the 1933 Act.
Profound affects resulted from U.S. capital controls and the IET. As U.S. capital markets were, as a practical matter, closed to Europeans seeking to raise money, they sought to raise U.S. dollars in the European markets, giving rise to a large Eurodollar market. U.S.-based international companies that sought to raise funds for overseas operations began looking to raise financings abroad.(69) As one author writes, "Because of the U.S. controls, the already existing Eurodollar market expanded greatly and became the dominant international capital market, making London once again the center of international finance."(70) Capital controls also isolated the U.S. capital markets from foreign securities offerings.
(67) April 27, 1964 Report to the President of the United States from the Task Force on Promoting Increased Foreign Investment in U.S. Corporate Securities and Increased Foreign Financing for U.S. Corporations Operating Abroad (Government Records)
(69) Stefan H. Robock, "Overseas Financing for U.S. Business," 21 Journal of Finance 297 (1966).
(70) Fred Block, The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present (Berkeley: University of California Press, 1977).
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